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EX-32.2 - EX-32.2 - LEAF GROUP LTD.leaf-20200331ex32230aaa6.htm
EX-32.1 - EX-32.1 - LEAF GROUP LTD.leaf-20200331ex32164b901.htm
EX-31.2 - EX-31.2 - LEAF GROUP LTD.leaf-20200331ex3127b3977.htm
EX-31.1 - EX-31.1 - LEAF GROUP LTD.leaf-20200331ex3111a9541.htm
EX-10.1 - EX-10.1 - LEAF GROUP LTD.leaf-20200331ex101cfa942.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                    to                    

 

Commission file number 001-35048

 


 

LEAF GROUP LTD.

(Exact name of registrant as specified in its charter)

 


 

 

 

Delaware

 

20-4731239

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

1655 26th Street
Santa Monica, CA

 

90404

(Address of principal executive offices)

 

(Zip Code)

 

(310) 656-6253

(Registrant’s telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.0001 par value

LEAF

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No  

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No  

 

As of May 5, 2020, there were 26,709,874 shares of the registrant’s common stock, $0.0001 par value, outstanding.

 

LEAF GROUP LTD.

INDEX TO FORM 10-Q

 

 

 

 

 

 

 

  

 

  

Page

Part I 

Financial Information

  

 

 

Item 1.

  

Condensed Consolidated Financial Statements (Unaudited)

  

1

 

 

  

Condensed Consolidated Balance Sheets

  

1

 

 

  

Condensed Consolidated Statements of Operations

  

2

 

 

  

Condensed Consolidated Statements of Comprehensive Income (Loss) 

  

3

 

 

  

Condensed Consolidated Statements of Stockholders’ Equity

  

4

 

 

  

Condensed Consolidated Statements of Cash Flows

  

5

 

 

  

Notes to the Condensed Consolidated Financial Statements

  

6

 

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

20

 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

36

 

Item 4.

  

Controls and Procedures

  

38

 

 

 

 

Part II 

Other Information

 

 

 

Item 1.

  

Legal Proceedings

  

38

 

Item 1A.

  

Risk Factors

  

38

 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

41

 

Item 3.

  

Defaults Upon Senior Securities

  

42

 

Item 4.

  

Mine Safety Disclosures

  

42

 

Item 5.

  

Other Information

  

42

 

Item 6.

  

Exhibits

  

42

 

 

  

Signatures

  

44

 

 

 

Part I.       FINANCIAL INFORMATION

 

Item 1.      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  

Leaf Group Ltd. and Subsidiaries 

Condensed Consolidated Balance Sheets  

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

 

2020

 

2019

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,648

 

$

18,106

 

Accounts receivable, net

 

 

9,613

 

 

14,402

 

Prepaid expenses and other current assets

 

 

3,042

 

 

2,555

 

Total current assets

 

 

24,303

 

 

35,063

 

Property and equipment, net

 

 

13,802

 

 

13,797

 

Operating lease right-of-use assets

 

 

12,097

 

 

12,645

 

Intangible assets, net

 

 

11,847

 

 

12,589

 

Goodwill

 

 

19,411

 

 

19,465

 

Other assets

 

 

1,305

 

 

1,044

 

Total assets

 

$

82,765

 

$

94,603

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

6,561

 

$

7,825

 

Accrued expenses and other current liabilities

 

 

17,554

 

 

21,291

 

Deferred revenue

 

 

4,894

 

 

2,464

 

Revolving line of credit

 

 

4,000

 

 

4,000

 

Total current liabilities

 

 

33,009

 

 

35,580

 

Deferred tax liability

 

 

70

 

 

63

 

Operating lease liabilities

 

 

10,112

 

 

10,863

 

Other liabilities

 

 

219

 

 

287

 

Total liabilities

 

 

43,410

 

 

46,793

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Common stock, $0.0001 par value. Authorized 100,000 shares; 28,258 and 26,603 shares issued and outstanding at March 31, 2020 and 27,938 and 26,283 shares issued and outstanding at December 31, 2019

 

 

 3

 

 

 3

 

Additional paid-in capital

 

 

564,615

 

 

562,332

 

Treasury stock at cost, 1,655 shares at March 31, 2020 and December 31, 2019

 

 

(35,706)

 

 

(35,706)

 

Accumulated other comprehensive loss

 

 

(82)

 

 

(20)

 

Accumulated deficit

 

 

(489,475)

 

 

(478,799)

 

Total stockholders’ equity

 

 

39,355

 

 

47,810

 

Total liabilities and stockholders’ equity

 

$

82,765

 

$

94,603

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


1

 

Leaf Group Ltd. and Subsidiaries 

Condensed Consolidated Statements of Operations  

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

    

2020

    

2019

 

Revenue:

 

 

 

 

 

 

 

Product revenue

 

$

16,382

 

$

17,541

 

Service revenue

 

 

16,483

 

 

16,497

 

Total revenue

 

 

32,865

 

 

34,038

 

Operating expenses:

 

 

 

 

 

 

 

Product costs (exclusive of amortization of intangible assets shown separately below)

 

 

12,449

 

 

13,818

 

Service costs (exclusive of amortization of intangible assets shown separately below)

 

 

8,977

 

 

7,912

 

Sales and marketing

 

 

7,670

 

 

7,638

 

Product development

 

 

5,520

 

 

5,569

 

General and administrative

 

 

8,084

 

 

8,540

 

Amortization of intangible assets

 

 

733

 

 

917

 

Total operating expenses

 

 

43,433

 

 

44,394

 

Loss from operations

 

 

(10,568)

 

 

(10,356)

 

Interest income

 

 

23

 

 

122

 

Interest (expense)

 

 

(89)

 

 

(4)

 

Other income (expense), net

 

 

10

 

 

(7)

 

Loss before income taxes

 

 

(10,624)

 

 

(10,245)

 

Income tax expense

 

 

(52)

 

 

(41)

 

Net loss

 

$

(10,676)

 

$

(10,286)

 

 

 

 

 

 

 

 

 

Net loss per share—basic and diluted

 

$

(0.40)

 

$

(0.40)

 

Weighted average number of shares—basic and diluted

 

 

26,424

 

 

25,601

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


2

 

 

Leaf Group Ltd. and Subsidiaries 

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

    

2020

    

2019

    

Net loss

 

$

(10,676)

 

$

(10,286)

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

 

(62)

 

 

27

 

Comprehensive loss

 

$

(10,738)

 

$

(10,259)

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


3

 

Leaf Group Ltd. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity  

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

other

 

 

 

 

 

 

 

 

 

 

 

 

 

paid-in

 

 

 

 

comprehensive

 

 

 

 

Total

 

 

Common stock

 

capital

 

Treasury

 

income

 

Accumulated

 

stockholders’

 

    

Shares

 

Amount

    

amount

    

stock

    

(loss)

    

deficit

    

equity

Balance at December 31, 2019

 

26,283

 

$

 3

 

$

562,332

 

$

(35,706)

 

$

(20)

 

$

(478,799)

 

$

47,810

Issuance of stock under employee stock awards and other, net

 

320

 

 

 —

 

 

 6

 

 

 —

 

 

 —

 

 

 —

 

 

 6

Tax withholdings related to vesting of share-based payments

 

 —

 

 

 —

 

 

(556)

 

 

 —

 

 

 —

 

 

 —

 

 

(556)

Stock-based compensation expense

 

 —

 

 

 —

 

 

2,833

 

 

 —

 

 

 —

 

 

 —

 

 

2,833

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(62)

 

 

 —

 

 

(62)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10,676)

 

 

(10,676)

Balance at March 31, 2020

 

26,603

 

$

 3

 

$

564,615

 

$

(35,706)

 

$

(82)

 

$

(489,475)

 

$

39,355

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

other

 

 

 

 

 

 

 

 

 

 

 

 

 

paid-in

 

 

 

 

comprehensive

 

 

 

 

Total

 

 

Common stock

 

capital

 

Treasury

 

income

 

Accumulated

 

stockholders’

 

    

Shares

 

Amount

    

amount

    

stock

    

(loss)

    

deficit

    

equity

Balance at December 31, 2018

 

25,483

 

$

 3

 

$

554,403

 

$

(35,706)

 

$

(52)

 

$

(451,961)

 

$

66,687

Issuance of stock under employee stock awards and other, net

 

319

 

 

 —

 

 

270

 

 

 —

 

 

 —

 

 

 —

 

 

270

Tax withholdings related to vesting of share-based payments

 

 —

 

 

 —

 

 

(1,322)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,322)

Stock-based compensation expense

 

 —

 

 

 —

 

 

2,045

 

 

 —

 

 

 —

 

 

 —

 

 

2,045

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

27

 

 

 —

 

 

27

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10,286)

 

 

(10,286)

Balance at March 31, 2019

 

25,802

 

$

 3

 

$

555,396

 

$

(35,706)

 

$

(25)

 

$

(462,247)

 

$

57,421

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

.


4

 

Leaf Group Ltd. and Subsidiaries 

Condensed Consolidated Statements of Cash Flows  

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

    

2020

    

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

 

$

(10,676)

 

$

(10,286)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,487

 

 

2,716

 

Non-cash lease expense

 

 

691

 

 

475

 

Deferred income taxes

 

 

 7

 

 

16

 

Stock-based compensation

 

 

2,704

 

 

1,921

 

Other

 

 

42

 

 

23

 

Change in operating assets and liabilities, net of effect of acquisitions and disposals:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

4,776

 

 

1,767

 

Prepaid expenses and other current assets

 

 

(506)

 

 

61

 

Other long-term assets

 

 

 —

 

 

60

 

Operating lease ROU assets and liabilities

 

 

(702)

 

 

(796)

 

Accounts payable

 

 

(1,264)

 

 

1,881

 

Accrued expenses and other liabilities

 

 

(3,869)

 

 

(6,156)

 

Deferred revenue

 

 

2,430

 

 

1,355

 

Net cash used in operating activities

 

 

(3,880)

 

 

(6,963)

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,708)

 

 

(1,607)

 

Cash paid for acquisitions, net of cash acquired

 

 

 —

 

 

(1,900)

 

Net cash used in investing activities

 

 

(1,708)

 

 

(3,507)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from exercises of stock options and purchases under ESPP

 

 

 6

 

 

270

 

Taxes paid on net share settlements of restricted stock units

 

 

(556)

 

 

(1,322)

 

Cash paid for acquisition holdback

 

 

(36)

 

 

 —

 

Cash paid for debt issuance costs

 

 

(6)

 

 

 —

 

Other

 

 

(16)

 

 

(30)

 

Net cash used in financing activities

 

 

(608)

 

 

(1,082)

 

Effect of foreign currency on cash, cash equivalents and restricted cash

 

 

 2

 

 

 —

 

Change in cash, cash equivalents and restricted cash

 

 

(6,194)

 

 

(11,552)

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

19,126

 

 

31,935

 

Cash, cash equivalents and restricted cash, end of period

 

$

12,932

 

$

20,383

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,648

 

$

19,665

 

Restricted cash included in other current assets

 

 

136

 

 

136

 

Restricted cash included in other long-term assets

 

 

1,148

 

 

582

 

Total cash, cash equivalents and restricted cash shown in the statement of cash flows

 

$

12,932

 

$

20,383

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 

 


5

 

 

Leaf Group Ltd. and Subsidiaries 

Notes to Condensed Consolidated Financial Statements  

(Unaudited)

1. Company Background and Overview

Leaf Group Ltd. (“Leaf Group” and, together with its consolidated subsidiaries, the “Company,” “our,” “we,” or “us”) is a Delaware corporation headquartered in Santa Monica, California. We are a diversified consumer internet company that builds enduring, digital-first brands that reach passionate audiences in large and growing lifestyle categories, including fitness and wellness and art and design.

Our business is comprised of two segments: Marketplaces and Media.

Marketplaces

Through our Marketplaces segment, we operate leading art and design marketplaces where large communities of artists and designers can market and sell their original art and designs printed on a wide variety of products. Our made-to-order marketplaces, consisting of Society6.com (“Society6”) and our wholesale channel, Deny Designs (collectively, “Society6 Group”), provide artists and designers with an online commerce platform to feature and sell their original art and designs on an array of consumer products primarily in the home décor category. Saatchi Art, inclusive of SaatchiArt.com (“Saatchi Art”) and its art fair event brand, The Other Art Fair (collectively, “Saatchi Art Group”), is a leading online art gallery where a global community of artists exhibit and sell their original artwork directly to consumers through a curated online gallery or in-person at art fairs hosted in the United Kingdom, Australia, Canada, and the United States. Saatchi Art’s online art gallery features a wide selection of original paintings, drawings, sculptures and photography.  

Media

Our Media segment brands educate and entertain consumers across a wide variety of life topics, including the popular “fitness and wellness” and “home and design” verticals. In the “fitness and wellness” vertical, our leading brands include Well+Good and Livestrong.com which help people lead healthier lives. In the “home and design” vertical, Hunker is our leading brand inspiring people to improve the space around them. These brands are the leaders in our catalog of over 60 other brands focused on specific categories or interests that we either own and operate or host and operate for our partners. 

2. Basis of Presentation

The accompanying interim condensed consolidated balance sheet as of March 31, 2020, the condensed consolidated statements of operations and condensed consolidated statements of comprehensive (loss) income for the three months ended March 31, 2020 and 2019, the condensed consolidated statements of cash flows for the three months ended March 31, 2020 and 2019 and the condensed consolidated statement of stockholders’ equity for the three months ended March 31, 2020 and 2019 are unaudited and have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities during the normal course of business. As previously disclosed in our Form 10-K for the year ended December 31, 2019, the Company has a history of recurring operating losses and cash used in operations and has an accumulated deficit. As of March 31, 2020 and December 31, 2019, cash and cash equivalents was $11.6 million and $18.1 million, respectively. Subsequent to March 31, 2020 as discussed in Note 17, the Company obtained additional liquidity from a $7.1 million loan under the Paycheck Protection Program and has entered into a $9.5 million Asset Sale and Service Agreement. Management anticipates that the forgoing cash proceeds, existing cash and cash equivalents, and forecasted operating cash flows will be sufficient to fund operations for at least the next 12 months. If cash needs exceed the Company’s future projections or otherwise sufficient capital resources are not available, the Company may need to extend its existing financing arrangement or enter into a new financing arrangement, dispose of certain assets, or defer or reduce controllable costs.

In the opinion of management, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited condensed consolidated financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair statement of our statement of financial position as of March 31, 2020, our results of operations for the three months ended March 31, 2020 and 2019, and our cash flows for the three months ended March 31, 2020 and 2019. The results for


6

 

the three months ended March 31, 2020 are not necessarily indicative of the results expected for the full year. The condensed consolidated balance sheet as of December 31, 2019 has been derived from our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.

The interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”), for interim financial information and with the instructions from the U.S. Securities and Exchange Commission (“SEC”) for Quarterly Reports on Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Leaf Group and its wholly owned subsidiaries. Acquisitions are included in our condensed consolidated financial statements from the date of the acquisition. Our purchase accounting resulted in all assets and liabilities of acquired businesses being recorded at their estimated fair values on the acquisition dates. All intercompany transactions and balances have been eliminated in consolidation.  

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Significant items subject to such estimates and assumptions include revenue, allowance for doubtful accounts, the assigned value of acquired assets and assumed liabilities in business combinations, useful lives and impairment of property and equipment, intangible assets, goodwill and other assets, the fair value of equity-based compensation awards, and deferred income tax assets and liabilities. Actual results could differ materially from those estimates. On an ongoing basis, we evaluate our estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of our assets and liabilities.

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. For public companies, these amendments are effective for the fiscal years and interim periods for those fiscal years beginning after December 15, 2020. Early adoption of the amendments is permitted. The Company is currently evaluating the impact of this standard.

 

3. Revenue Recognition

Revenue

 

Revenue is recognized when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate the transaction price to each performance obligation based on the estimated standalone selling price of the promised good or service. We allocate any arrangement fee or other incentive or promotional offers to each of the elements based on their relative selling prices.  

 

We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses. We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts where we recognize revenue in the amount which we have the right to invoice for services performed. We do not capitalize costs incurred to fulfill a contract when the contract term is one year or less.


7

 

Our revenue is principally derived from the following products and services:

Product Revenue

Marketplaces

We recognize Marketplaces product revenue from sales of products when we transfer control of promised goods to our customers in an amount that reflects the consideration to which we expect to be entitled to in exchange for those goods. In determining the amount of consideration we expect to be entitled to, we take into account sales allowances, estimated returns based on historical experience and any incentive offers provided to customers to encourage purchases, including percentage discounts off current purchases, free shipping and other promotional offers. Because we are the principal in a transaction and obtain control of the goods before they are transferred to the customer, we record product revenue at the gross amount. Value-added taxes (“VAT”), sales tax and other taxes are not included in product revenue because we are a pass-through conduit for collecting and remitting any such taxes.  

Media

We generate Media product revenue from products sold on our online media properties.

Service Revenue

Marketplaces

We generate Marketplaces service revenue from commissions we receive from facilitating the sale of original art by artists to customers through Saatchi Art. We also generate Marketplaces service revenue from various sources relating to Saatchi Art’s The Other Art Fair, including commissions from the sale of original art, fees paid by artists for stands at fairs and through sponsorship opportunities with third-party brands and advertisers. We recognize fair-related service revenue upon completion of each fair. We recognize service revenue arising from the sale of original art net of amounts paid to the artist because we are not the principal in the transaction and we do not obtain control over the original art. Revenue is recognized when we transfer control of the promised service, which is after the original art has been delivered and the return period has expired. We provide incentive offers to Saatchi Art customers to encourage purchases, including percentage discounts off current purchases, free shipping and other promotional offers. VAT, sales tax and other taxes are not included in Marketplaces service revenue because we are a pass-through conduit for collecting and remitting any such taxes.

Media

Advertising Revenue. We generate Media service revenue primarily from advertisements displayed on our online media properties and on certain webpages of our partners’ media properties that are hosted by our content services. Articles, videos and other forms of content generate advertising revenue from a diverse mix of advertising methods including display advertisements, where revenue is dependent upon the number of advertising impressions delivered; performance-based cost-per-click advertising, in which an advertiser pays only when a visitor clicks on an advertisement; sponsored content; or advertising links. Performance obligations pursuant to our advertising revenue arrangements typically include a minimum number of impressions or the satisfaction of other performance criteria. Revenue from performance-based arrangements is recognized as the related performance criteria are met. We assess whether performance criteria have been met based on a reconciliation of the performance criteria. The reconciliation of the performance criteria generally includes a comparison of third-party performance data to the contractual performance obligation and to internal or partner-performance data in circumstances where that data is available. 

Where we enter into revenue-sharing arrangements with our partners, such as those relating to our advertiser network, we report revenue on a gross or net basis depending on whether we are considered the principal in the transaction. In addition, we consider which party controls the service, including which party is primarily responsible for fulfilling the promise to provide the service. We also consider which party has the latitude to establish the sales prices to advertisers. When we are considered the principal, we report the underlying revenue on a gross basis in our condensed consolidated statements of operations, and record these revenue-sharing payments to our partners in service costs.

Content Sales and Licensing Revenue. We generate revenue from the sale or license of media content, including the creation and distribution of content for third-party brands and publishers. Revenue from the sale or perpetual license of media content is recognized


8

 

when the control of content is transferred or when the right to use is transferred and the contractual performance obligations have been fulfilled. Revenue from the non-perpetual license of media content is recognized over the period of the license as the right to access content is delivered or when other related performance criteria are fulfilled. In circumstances where we distribute our content on third-party properties and the customer acts as the principal, we recognize revenue on a net basis.

Disaggregation of Revenue

 

The following table presents our revenues disaggregated by revenue source (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

    

 

2020

    

2019

Product

 

 

 

 

 

 

 

Marketplaces

 

 

$

16,381

 

$

17,541

Media

 

 

 

 1

 

 

 —

Service

 

 

 

 

 

 

 

Marketplaces

 

 

 

2,360

 

 

3,297

Media

 

 

 

14,123

 

 

13,200

Total revenue

 

 

$

32,865

 

$

34,038

 

Deferred Revenue

Deferred revenue consists of amounts received from or invoiced to customers in advance of our performance obligations being satisfied, including amounts which are refundable. Deferred revenue includes payments received from sales of our products on Society6 and Deny Designs prior to the transfer of control of such products to the customers; payments made for original art sold via Saatchi Art that are collected prior to the completion of the return period upon which our service is considered completed; and amounts billed to media customers prior to delivery of content; and sales of subscriptions for premium content or services not yet delivered. During the three months ended March 31, 2020, we recognized $2.0 million of revenues that were included in the deferred revenue balance as of December 31, 2019.

Our payment terms vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services, we require payment before the products or services are delivered to the customer.  

4. Property and Equipment

Property and equipment consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

 

2020

 

2019

 

Computers and other related equipment

 

$

11,576

 

$

11,333

 

Purchased and internally developed software

 

 

35,512

 

 

34,008

 

Furniture and fixtures

 

 

1,514

 

 

1,514

 

Leasehold improvements

 

 

6,795

 

 

6,795

 

Machinery and related equipment

 

 

569

 

 

569

 

 

 

 

55,966

 

 

54,219

 

Less accumulated depreciation

 

 

(42,164)

 

 

(40,422)

 

Property and equipment, net

 

$

13,802

 

$

13,797

 

 


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Depreciation and software amortization expense, which includes losses on disposal of property and equipment of less than $0.1 million for the three months ended March 31, 2020 and 2019, is shown by classification below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

    

2020

    

2019

    

Product costs

 

$

522

 

$

368

 

Service costs

 

 

1,047

 

 

936

 

Sales and marketing

 

 

 9

 

 

 7

 

Product development

 

 

13

 

 

11

 

General and administrative

 

 

163

 

 

477

 

Total depreciation

 

$

1,754

 

$

1,799

 

 

5. Goodwill and Intangible Assets

The following table presents the changes in our goodwill balance (in thousands):

 

 

 

 

 

Balance at December 31, 2019

    

$

19,465

Foreign currency impact

 

 

(54)

Balance at March 31, 2020

 

$

19,411

We have two reporting units, Marketplaces and Media. Goodwill related to our Marketplaces reporting unit was $17.1 million as of March 31, 2020. Goodwill related to our Media reporting unit was $2.3 million and was recorded in connection with the acquisition of Well+Good in June 2018.

Intangible assets consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

Gross carrying

 

Accumulated

 

Net carrying

 

 

amount

 

amortization

 

amount

Customer relationships

 

$

4,003

 

$

(3,288)

 

$

715

Artist relationships

 

 

12,217

 

 

(11,395)

 

 

822

Media content

 

 

91,491

 

 

(91,344)

 

 

147

Technology

 

 

6,204

 

 

(6,202)

 

 

 2

Non-compete agreements

 

 

25

 

 

(25)

 

 

 —

Trade names

 

 

18,241

 

 

(8,080)

 

 

10,161

 

 

$

132,181

 

$

(120,334)

 

$

11,847

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

Gross carrying

 

Accumulated

 

Net carrying

 

 

amount

 

amortization

 

amount

Customer relationships

 

$

4,003

 

$

(3,074)

 

$

929

Artist relationships

 

 

12,230

 

 

(11,336)

 

 

894

Media content

 

 

91,491

 

 

(91,333)

 

 

158

Technology

 

 

6,204

 

 

(6,156)

 

 

48

Non-compete agreements

 

 

25

 

 

(25)

 

 

 —

Trade names

 

 

18,276

 

 

(7,716)

 

 

10,560

 

 

$

132,229

 

$

(119,640)

 

$

12,589

 

Identifiable finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives commencing on the date that the asset is available for its intended use.


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Total amortization expense for the periods shown below includes (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

    

2020

    

2019

    

Service costs

 

$

13

 

$

67

 

Sales and marketing

 

 

285

 

 

302

 

Product development

 

 

46

 

 

162

 

General and administrative

 

 

389

 

 

386

 

Total amortization

 

$

733

 

$

917

 

 

 

 

 

6. Accrued Expenses and Other Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2020

    

2019

 

Accrued payroll and related items

 

$

3,383

 

$

3,841

 

Artist payables

 

 

4,163

 

 

5,640

 

Accrued product costs

 

 

1,121

 

 

1,678

 

Operating lease liabilities

 

 

2,964

 

 

2,772

 

Contingent liabilities

 

 

1,194

 

 

1,087

 

Other

 

 

4,729

 

 

6,273

 

Accrued expenses and other current liabilities

 

$

17,554

 

$

21,291

 

 

Other long-term liabilities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2020

 

2019

 

Accrued rent

 

$

 —

 

$

            —

 

Contingent liabilities

 

 

 —

 

 

            —

 

Other

 

 

219

 

 

287

 

Other liabilities

 

$

219

 

$

287

 

As part of the acquisition of Deny Designs in May 2017, contingent consideration of up to $3.6 million is payable to the seller annually in three equal installments on the first through third anniversary of the closing date. The contingent consideration was valued at $2.8 million as of the acquisition date based on time value, discount rate, and the estimated probability of achieving the contingent criteria related to the ongoing development of new products for sale, as specified in the purchase agreement. Such amounts are adjusted at each subsequent period based on probability of achievement until settlement of such liability. Adjustments to the liability are recorded to income or expense in our condensed consolidated statement of operations. The fair value adjustment to the liability for the three months ended March 31, 2020 was not material. The May 2018 and May 2019 installments of the contingent consideration, net of post-closing working capital adjustments to the purchase price, were paid to the seller in the amounts of $1.1 million and $1.2 million, respectively. The estimated amount payable upon the third anniversary is included in accrued expenses and other current liabilities in our condensed consolidated balance sheets.

 

7. Debt

On November 7, 2019, we entered into a credit facility. The loan and security agreement is a 364-day senior secured working capital revolving line of credit with Silicon Valley Bank (the “Lender”). Our credit facility is asset-based and provides for a maximum amount up to the lesser of (i) $10.0 million, or (ii) 80% of eligible accounts receivable, as described in the loan and security agreement. Any borrowed amounts outstanding under our credit facility bear interest at a floating rate equal to the greater of (i) WSJ Prime Rate plus 0.50%, or (ii) 5.0%. We must also pay an unused line fee of 0.20% per annum based on maximum commitments less outstanding balances on the line of credit, payable monthly in arrears. The agreement is secured by substantially all of our assets, including intellectual property.


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The credit facility contains customary representations and warranties and customary reporting, affirmative and negative covenants, including, among other things, restrictions on indebtedness, liens, investments, mergers, acquisitions, dispositions, declarations of dividends and stock repurchases. In addition, we are required to maintain the required percentage (85%) of our global cash on account with the Lender (the “Required Percentage”), provided that such amount may fall below the Required Percentage for a period of time not to exceed 10 consecutive business days each calendar month (but in no event can the amount be less than 75% of our global cash). Furthermore, the credit facility contains customary events of default that include, among others, failure to pay principal, interest or fees when due, failure to comply with the other terms of the credit facility and related agreements, the occurrence of a material adverse change and certain insolvency-related events. The existence of an event of default would allow the Lender to terminate its lending commitments, demand repayment of its loans and otherwise exercise all rights and remedies of a secured creditor.

As of March 31, 2020, we had $4.0 million of borrowings outstanding under our credit facility at an interest rate of 5.25%. Our total borrowing capacity under the credit facility was $5.6 million as of March 31, 2020. We are in compliance with all restrictions and have met all debt payment obligations as of March 31, 2020.

 

 

 

8. Leases

 

We adopted ASU 2016-02—Leases (Topic 842) as of January 1, 2019, using the new transition method issued under ASU 2018-11, which allows an entity to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption and also allows an entity to elect not to recast its comparative periods in transition. In addition, we elected to use the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. We also elected to use the practical expedient related to short-term leases, allowing us to not recognize right-of-use assets and lease liabilities for leases with a lease term of 12 months or less. As of March 31, 2020, short-term leases were not material. As of March 31, 2020, finance leases were not material and are therefore not included in the following disclosures.

 

Operating lease expense for the three months ended March 31, 2020 and 2019 was $1.0 million and $0.7 million, respectively.

 

 

Supplemental cash flow information related to leases was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

    

2020

    

2019

    

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

1,004

 

$

737

 

 

Supplemental balance sheet information related to leases was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

December 31, 

 

    

2020

    

 

2019

Operating leases:

 

 

 

 

 

 

 

Operating lease right-of-use assets

 

$

12,097

 

$

12,645

 

 

 

 

 

 

 

 

 

Accrued expenses and other current liabilities

 

 

2,964

 

 

2,772

 

Operating lease liabilities

 

 

10,112